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Market Plunge Baffles Wall Street

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Re: Market Plunge Baffles Wall Street

#31

Post by pw0ncakes »

starkfist wrote: post #27
mattmanser wrote: post #17

Earlier quoted context omitted.

Reading this just makes me feel even more that the whole HF trading thing is the biggest con going out there.

The biggest con out there is government employees making salaries that are on average double than private enterprise... but I guess that's a different discussion.

Actually, a much worse con, if you want to have this discussion, is that millions of private-sector corporate employees are getting paid peanuts for their work, compensated largely with a promise of future prosperity/advancement that will never come through. A much worse con is that the economic growth since 1975 has been siphoned off almost entirely by the increasingly entrenched upper classes, with consumer debt, a housing bubble, and student-loan debt bondage replacing wage increases to fuel the growth. A much worse con is an economy now plagued by individual insolvency and a widespread lack of trust, resulting from these catastrophic social changes.

Do you really think that it's of benefit to society for some people to show up to work every day and take home Wal-Mart wages, instead of having real alternatives?

A large share of this government waste goes to military contractors employed in completely unnecessary wars such as the multi-trillion-dollar mess in Iraq.

Also, please cite your "on average double" statistic. If my memory serves me, the discrepancy is about 30% on average, mainly because private-sector pay is far more recession-sensitive. (The discrepancy would shrink, if not reverse, in a growing economy with a healthy private sector.) For the record, low-level government employees do make more while upper-level people make considerably less than they do in the private sector.

Re: Market Plunge Baffles Wall Street

#32

Post by startuprules »

cynicalkane wrote: post #29
startuprules wrote: post #21

"The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices. This US equity rally was driven by technically oriented buying from the Banks and the hedge funds. There was and still is a lack of legitimate institutional buying at these price levels. This was machine driven speculation enabled by the lack of reform in a…

If there were no buys to prop up the free falling, why did the markets rebound almost instantly?

government intervention via JPM trading desks and trades cancellation from the exchanges

Re: Market Plunge Baffles Wall Street

#34

Post by jplewicke »

The word on the Street right now is that NYSE moved some stocks from normal electronic trading to human-mediated trading at 2:40 PM. They were trying to slow down unusual trading activity in those stocks, and they thought they could do that by giving their human market makers a bit of time to consider prices and do the right thing. Unfortunately, when they stopped electronic trading for those stocks, all the orders they would otherwise have handled got sent to a bunch of smaller electronic exchanges that didn't have enough liquidity. That started to tank a few specific stocks scarily fast, which triggered a bunch of stat-arb trades and plunged the indices down. Once that got bad enough, all the liquidity providers got spooked and backed out of the market for about 10 minutes. Felix Salmon has a good writeup at http://blogs.reuters.com/felix-salmon/2010/05/07/deconstruct... .

This isn't necessarily everything that happened -- there's a ton of other rumors flying around about the yen carry trade and a lot of other random stuff.

Re: Market Plunge Baffles Wall Street

#35

Post by rbanffy »

fredmg wrote: post #22

To protect against an unexpected market crash, traders have stop-loss orders that can be executed automatically if the market starts to tank. Trader 1 puts in a order to sell everything if the market goes down by 4% in 1 hour. Trader 2 knows that and wants to get out of the market before trader 1 does in a crash, so he puts in a order to sell everything if the market goes down by 3.9% in 1 hour. Trader 3, Trader 4, e…

> But when their own stop-loss program sells for a 70% loss they get a do over.

There has to be a mechanism to undo cascade mistakes because, if someone figures out a way (and that's rather easy) to induce mistakes and to profit from them, it will shortly become the prevalent form of trading. We want exchanges to foster investment on productive companies.

Re: Market Plunge Baffles Wall Street

#36

Post by e40 »

rbanffy wrote: post #35
fredmg wrote: post #22

To protect against an unexpected market crash, traders have stop-loss orders that can be executed automatically if the market starts to tank. Trader 1 puts in a order to sell everything if the market goes down by 4% in 1 hour. Trader 2 knows that and wants to get out of the market before trader 1 does in a crash, so he puts in a order to sell everything if the market goes down by 3.9% in 1 hour. Trader 3, Trader 4, e…

> But when their own stop-loss program sells for a 70% loss they get a do over. There has to be a mechanism to undo cascade mistakes because, if someone figures out a way (and that's rather easy) to induce mistakes and to profit from them, it will shortly become the prevalent form of trading. We want exchanges to foster investment on productive companies.

I was about to agree with the GPP, but you have a really good point. This would be the sort of loophole that would be exploited.

Re: Market Plunge Baffles Wall Street

#37

Post by blantonl »

cynicalkane wrote: post #29
startuprules wrote: post #21

"The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices. This US equity rally was driven by technically oriented buying from the Banks and the hedge funds. There was and still is a lack of legitimate institutional buying at these price levels. This was machine driven speculation enabled by the lack of reform in a…

If there were no buys to prop up the free falling, why did the markets rebound almost instantly?

Because liquidity returned to the market.

The problem was the NYSE paused trading for many of the stocks in question for 90 secs because of heavy sell pressure, driving those trades to other markets which had little to no liquidity for a few minutes (and are solely electronic). Compound that with a possible trading error, and HFT algorithms, and you had a short period of time where there were no bids for those stocks on those electronic markets.

When liquidity for those stocks returned to the market, the proper forces brought the stocks back to their bid/ask prices in a liquid market.

Re: Market Plunge Baffles Wall Street

#38

Post by nostrademons »

startuprules wrote: post #32
cynicalkane wrote: post #29

Earlier quoted context omitted.

If there were no buys to prop up the free falling, why did the markets rebound almost instantly?

government intervention via JPM trading desks and trades cancellation from the exchanges

Do you have any evidence whatsoever for that? Or is it just a case of "when something I can't explain happens, it's because the government did it"?

Re: Market Plunge Baffles Wall Street

#39

Post by pw0ncakes »

mattmanser wrote: post #17
pw0ncakes wrote: post #4

Earlier quoted context omitted.

A lot of HF traders pull out in times like this for technological reasons. For example, most quotefeeds (such as Reuters, if my memory serves) have outdated technology that handles load really badly. When quotes are 5+ seconds slow, they're essentially useless, given that HF trading occurs on a millisecond timeframe. Most liquidity providers would love to be in the market when it's panicking, because this is a great…

Reading this just makes me feel even more that the whole HF trading thing is the biggest con going out there.

It's not, at least not completely.

Arbitrage and market-making are legitimate businesses that provide liquidity to markets, making it easier for other traders to get fair trades. (Whenever you trade, the fair value is assumed to be somewhere between the bid and ask, so you're paying about half the spread on every share you trade.)

Of course, many hedge funds out there are scams that exist to take fees while taking ridiculous (and poorly-disclosed) risks with others' money, but not all of them are.

Re: Market Plunge Baffles Wall Street

#40

Post by khafra »

rbanffy wrote: post #35
fredmg wrote: post #22

To protect against an unexpected market crash, traders have stop-loss orders that can be executed automatically if the market starts to tank. Trader 1 puts in a order to sell everything if the market goes down by 4% in 1 hour. Trader 2 knows that and wants to get out of the market before trader 1 does in a crash, so he puts in a order to sell everything if the market goes down by 3.9% in 1 hour. Trader 3, Trader 4, e…

> But when their own stop-loss program sells for a 70% loss they get a do over. There has to be a mechanism to undo cascade mistakes because, if someone figures out a way (and that's rather easy) to induce mistakes and to profit from them, it will shortly become the prevalent form of trading. We want exchanges to foster investment on productive companies.

It's a market for intangibles; over the short term it's zero-sum. The only way to profit is to induce mistakes; to get someone on the other side of a trade that's profitable to you and damaging to them.

If algorithmic trading causes vulnerability to mistakes, they need to revise their algorithms or factor in the risk of this type of loss; that's the way free markets work. The externalities of a sudden crash suck, but other than as a one-time emergency measure, rolling back all the trades isn't a good solution. Wall Street firms should've learned something since 1987.

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